Michael

- Porter’s
- Five
Competitive
Forces
Three Generic
-
Strategies BY
&
About Michael Porter …
1. Born 1947 in United states
2. Received bachelor degree in
aerospace and Mechanical
engineering in 1969.
3. MBA from Harvard University in
1971.
4. PhD in Business Economics from
Harvard in 1973.
5. He is currently Bishop Williams
Lawrence University Professor
based at Harvard Business school
where he leads “The Institute for
Strategy and Competitiveness.
Porter’s five Competitive
forces
1. Five interactive competitive forces
determines an industry’s long term
attractiveness: present competitors
,potential competitors, the bargaining
power of suppliers, the bargaining power
of buyers and threat of substitute
products.
2. The strength of individual forces varies
from industry to industry, or within same
industry.
For e.g. In the fast food industry in
India, KFC versus McDonald's versus Pizza
hut versus
Jumbo king.
 Porter’s Model
New capacity to gain
Potential entrants
market share

Threat of new entrants

Bargaining power Industry competitors Bargaining power of buyers

of suppliers

Suppliers/Sub-cons Customers / Buyers

To rise Prices or To force down price,
reduce the quality Rivalry among Bargain for high quality
existing firms
threat of substitute
products or services
Substitutes
Appear to be different,
satisfy the same needs
Rivalry among the present
Competitors
1. Rivalry is between the firms that
produce products which are close
substitutes for each other.
2. Firms are mutually dependent.
3. Profitability decreases as rivalry
increases.
 Rivalry is greater under
following conditions:-
1. There is a high investment intensity- the amount
of fixed and working capital required to produce a
dollar of sales is large. High intensity require firm to
operate at or near capacity as much as possible,
putting strong downward pressure on prices when
demand slackens.
Such firms are less profitable than those with lower
level of investment
2. There are many small firms in an industry or
no dominant firms exist-
In recent years, hundreds of
pharmaceutical companies have started up,
all hoping to produce new wonder drugs. In
such crowded segments as neurosciences,
inflammatory diseases and drug delivery,
competition is keen, and some companies
are considering preemptive steps in an
effort to dominate the niches.
3. There is little product differentiation- e.g. Major
appliances, TV sets.
4. There is high cost to changing suppliers (switching
costs)
5. Players applying same strategies.
6. Low market growth rates (growth of a particular
company is possible only at the expense of a
competitor).
7. Barriers for exit are high (e.g. expensive and highly
specialized equipment-manufacturing industry.).
Threats of New Entrants:-

1. It is a second force affecting industry

attractiveness.
2. New competitors add capacity to the
industry and bring with them the need
to gain market share , thereby making
competition more intense.
3. The greater the threat of new entrants,
the less will be an industry’s
attractiveness.
Entry is more difficult under
the following conditions:-
1. When strong economies of
scale(minimum size required for
profitable operations) and learning
effects are present, it takes time to
obtain the volume and learning required
to yield a low relative cost per unit. If
firms already present are vertically
integrated , entry becomes even more
expensive.
2. If the industry has strong capital
requirements at the outset.
3.When strong product differentiation exists
4.If gaining distribution is particularly
difficult.
5.If a buyer incurs switching costs in moving
from one supplier to another.
6. Brand loyalty of customers.
7. Protected intellectual property like
patents, licenses etc.
8. Scarcity of important resources, e.g.
qualified expert staff
9. Access to raw materials is controlled
by existing players .
10. Legislation and government action
 
Example

1. The sector in which entry barriers are

low is IT Sector.
2. The sector in which entry barriers high,
and where the player has to start from
scratch is in power, energy plants.
 Determinants of supplier power
 The supplier industry is dominated by a few companies but it sells to
many (e.g., the petroleum industry)

 It’s product or service is unique and/or it has built up switching cost

(e.g., word processing software)

 Substitutes are not readily available (e.g., electricity)

 Suppliers are able to integrate forward (e.g., Intel can make PCs)
 Determinants of buyer power
 A buyer purchase a large portion of the seller’s product of service
(e.g., oil filters purchased by a major auto maker)
 A buyer has the potential to integrate backward industries
 Alternative suppliers are plentiful because the product is standard or
undifferentiated (e.g., gas station for motorist)
 Changing suppliers costs very little (e.g., office supplies)
 A buyer earns low profits and is very sensitive to cost (e.g., grocery store)
 The purchased product is unimportant to the final quality or price of a
buyers product or service (e.g., electric wire brought for use in lamp)
 Threats of Substitutes

A threat from substitutes exists if there are

alternative products with lower prices of better
performance parameters for the same purpose.
They could potentially attract a significant
proportion of market volume and hence reduce the
potential sales volume for existing players. This
category also relates to complementary products.
The threat of substitutes is determined by factors
like-
1. Brand loyalty of customers
2. Close customer relationships
3. Switching costs for customers
4. The relative price for performance of
substitutes
5. Current trends.
For example, “a manufacturer of TV
sets" might consider as 'substitutes' for
TV sets as those things customers
could buy instead, in order to satisfy
their need for entertainment and news:
a home computer to go online or watch
DVDs, a radio, theater tickets, movie
rentals, newspaper or magazine
subscriptions, books, and so on.
Example: Splenda
 Johnson and Johnson has done the
impossible
 How? Attacking sugar directly, not other
artificial sweeteners
 Timeline:
 1976 – sucralose discovered by Tate & Lyle –
accidental discovery
 Discovered that product is 600 times sweeter
than sugar – yet is not absorbed as a
carbohydrate
Splenda
 To build Buzz, product was first rolled out to
diabetics
 On to grocery stores and restaurants
 Partnered with many major companies –
now in McDonald’s, Starbucks, Coke etc
 Consumers are demanding Splenda
 Has dipped into sugar sales and also
exceeds sales for Equal and Sweet’N’Low
combined!
The options for the organizations to
get rid of these determinants:-
Reducing competitive rivalry
between the existing competitors-
i. Avoid price competition
ii. Differentiate your product
iii. Buy out competition
iv. Reduce industry over-capacity
v. Focus on different segments
vi. Communicate with competitors
Reducing Threats of new entrants-
1. Increase minimum efficient scales of operations.
2. Create marketing/brand image.
3. Patents, protection of intellectual property.
4. Alliances with link products and services.
5. Tie up with suppliers.
6. Tie up with distributors.
7. Retaliation tactics.
Reducing Bargaining Power of Suppliers:-
i. Partnering
ii. Supply chain management
iii. Supply chain training
iv. Increase dependency
v. Build knowledge of supplier costs and methods
vi. Take over the supplier
 Reducing the bargaining power of
customers:-
i. Partnering
ii. Supply chain management
iii. Increase loyalty
iv. Increase incentives and value added.
v. Cut put intermediaries (go directly to the
customer)
Reducing the threats of Substitutes:-
i. Legal actions
ii. Increase switching costs
iii. Alliances
iv. Customer surveys to learn about their
preferences
v. Enter substitute market and influence from
within
 A five forces Analysis of the
Cellular Phone Services Industry
Rationale
Five Forces Score

Products are differentiated through

1. Rivalry among Rivalry is low to
new features and services;
the present moderate: moderately customer switching cost are low.
competitors favourable

2. Threat of Threat of new Rapid pace of technological

new entrants entrants is high: change may bring new entrants
moderately based on new technologies:
unfavourable satellites.

3.Supplier power Supplier power is Governments have raised the

high: moderately price of additional bandwidth
unfavourable. through auctions.
 Forces Score Rationale

Even large customers have little

4.Buyer power Buyer power is
power to set terms and
low: very
conditions in this oligopolistic
favourable
industry.

5.Threat of Threat of
substitutes substitutes is PDA’S or new multimedia
high: moderately devices could replace cell
unfavourable phones.

Conclusion: Only two of the five forces are favourable, while three are
unfavourable. Thus the cellular phone service industry is not
attractive at this time according to porter’s model
 Example of Industry analysis (Athletic
shoe industry)
 rating each competitive force as high, medium, or low in strength
 Rivalry : High (Nike, Reebok, and Adidas)
 Threat of potential entrants: Low (maturity industry, growth rate is slow)
 Threat of substitute: Low
 Bargaining power of suppliers: Medium but rising (Suppliers increasing
in size and ability)
 Bargaining power of buyers: medium, but increasing.,
 Based on current trends, the industry appears to be increasing its
competitive intensity, profit margin will be falling for the industry
 The
Three
Generic
Strategies
 Three Generic Strategies
 Three generic strategies to overcome the five forces
and achieve competitive advantage…

– Overall cost leadership

 Low-cost-positionrelative to a firm’s peers
 Manage relationships throughout the entire value chain
– Differentiation
 Create products and/or services that are unique and valued
 Non-price attributes for which customers will pay a premium
– Focus strategy
 Narrow product lines, buyer segments, or targeted
geographic markets
 Attain advantages either through differentiation or cost
leadership
The Generic Strategies
1.Cost Leadership – Offer
substitutable products at
the lowest price. E.g.
LCC.
2. Differentiation –
Distinguish products and
services in order to
charge a premium price.
E.g. Mercedes
3.Focus – Follow one of the
other strategies in a
narrow market
Overall Cost Leadership
1. It is through a set of functional policies aimed at
the basic objective
2. It requires aggressive construction of efficient-
scale facilities, tight cost, overhead control, cost
minimization in the areas like R&D, sales force,
advertising etc.
3. Low cost becomes the theme though quality,
service and other areas cannot be ignored.
Low cost strategy can defend
against…
1. Rivalry from the competitors - as its low cost
means that it still can earn returns after its
competitors have competed away their profits
through rivalry.
2. Powerful buyers – as buyers can exert
pressure to reduce price only to the level of the
next most efficient competitor.
3. Powerful suppliers - provides flexibility to
cope up input cost.
4. Entry Barriers – in terms of cost advantage.
5. Substitutes – In favourable position compare
to the competitors.
Things required for Cost
Leadership:-
1. High relative market share.
2. Access to raw materials.
3. Heavy up-front capital investment.
4. Aggressive pricing.
5. Start-up losses.
Firms implementing cost leadership in
U.S. are Texas Instruments, Du Pont
Hyundai and South-west airlines …
Case on Cost Leadership:-
1. Harnischfeger revolutionize the rough terrain
crane industry.
2. It had market share of 15%.
3. Redesigned its cranes, modularized its
components, configured changes, reduce
material content, established assembly areas,
ordered parts in large volumes to reduce cost.
4. This all reduce its price by 15%
5. Market share grown to 25%
 Few management layers Standardized account-
Value-Chain
Activities
Firm
infrastructure to reduce overhead ing practices to minimize
costs personnel required
Human resource Minimize costs associated Effective orientation and
management with employee turnover training programs to maxi-
through effective policies mize employee productivity IN COST
Technology Effective use of automated Expertise in process LEADERSHIP
development technology to reduce engineering to reduce
scrappage rates manufacturing costs
Effective policy guidelinesShared purchasing operations
to ensure low cost raw with other business units
Procurement
materials (with acceptable
quality levels)
Effective Effective Effective Purchase of Thorough service
layout of use of utilization media in repair guidelines to
receiving quality of large blocks minimize repeat
dock control delivery maintenance calls
operation inspectors fleets Sales force
to utilization is Use of single type
minimize maximized of repair vehicle
rework on by territory to minimize
the final management costs
product

Inbound Operations Outbound Marketing Service

logistics logistics and sales

Exhibit 5.3 Value-Chain Activities: Examples of Overall Cost Leadership

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage:
Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
Differentiation
Strategy
1. Differentiating owns product and
service from the other firms in the
industry.
2. To provide uniqueness
3. It is viable strategy for earning
above average returns in an
industry as it creates defensible
position for coping with the five
competitive forces.
1. It provides insulation against rivalry
because of brand loyalty by the
customers.
2. The resulting customer loyalty and the
need for a competitor to overcome
uniqueness provide entry barriers.
3. Buyers lack comparable alternatives
and thereby are less price sensitive.
4. Customer loyalty are better positioned
for the substitutes.
 Things required to achieve
differentiation
1. Extensive research
2. Product design
3. High quality materials
4. Intensive customer support
5. Higher cost
6. Higher prices
E.g. Mercedes, Harley Davidson, BMW
Caterpillar, Nike…
 Firm Superior MIS—To integrate Facilities that Widely respected
Value-
Chain
infrastructure value-creating activities to promote firm CEO enhances
improve quality image firm reputation
Programs to attract talented Provide training and
Human resource engineers and scientists

Activities:
incentives to ensure a strong
management customer service orientation
Superior material handling Excellent applications
Technology and sorting technology engineering support
development

Purchase of high-quality Use of most prestigious outlets

Procurement components to enhance
product image

Superior Flexibility Accurate and Creative Rapid response

material and speed in responsive and to customer
handling responding order innovative service
operations to changes processing advertising requests
to minimize in manu- programs
damage facturing Effective Complete
specs product Fostering inventory of
Quick replenish- of personal replacement
transfer of Low defect ment to relation- parts and
inputs to rates to reduce ship with supplies
manufactur- improve customer’s key DIFFERENTIATIO
ing process quality inventory customers
N

Inbound Operations Outbound Marketing Service

logistics logistics and sales

Exhibit 5.5 Value-Chain Activities: Examples of Differentiation

Source: Adapted with the permission of The Free Press, a division of Simon & Schuster, Inc., from Competitive Advantage:
Creating and Sustaining Superior Performance by Michael E. Porter. Copyright © 1985 by Michael E. Porter.
Focus
1. It suggest to focus on a particular buyer group,
segment of the product line, or geographic market.
2. The strategy base on the premise that the firm is able
to serve its narrow strategic target more effectively
than the competitors who are competing more broadly.
3. Firms either use low cost or differentiation strategy to
achieve the result.
E.g. Johnson & Johnson- focus strategy that achieves
differentiation position in baby care products.
Air – Deccan – focus strategy that achieves low cost
position.
 Focus / Niche Strategies
and Competitive Advantage
Approach 1
 Achieve lower costs than
rivals in serving the segment --
A focused low-cost strategy
Approach 2
Which hat
 Offer niche buyers something
is unique?
different from rivals --
A focused differentiation strategy
 Competitive Advantage
Lower Cost Differentiation
Competitive Scope

Broad
target Cost Leadership Differentiation

Narrow
target
Cost Focus Differentiation Focus

ource: from Competitive Strategy by Michael E. Porter

1. The firm achieving focus may also potentially
earn above average returns for its industry.
2. Focus means that the firm either has a low cost
position , high differentiation or both.

For e.g. FEVICOL focused on the specialty markets

for fasteners where it can design products
according to the buyers need.
Barista and cafe-coffee day focused more on the
soft beverages - differentiation
 E.g.
1. An example of a focus strategy that achieves a low cost
position in serving its particular target is Air-Asia airlines in
Malaysia which has provided the most economical fares
mainly focusing on cost cutting in various departments.
2. While Singapore Airlines is an example of focus strategy
that achieves high differentiation with high cost serving
particular target.
Examples of Focus Strategies

 eBay
 Online auctions
 Porsche
 Sports cars
 Jiffy Lube International
 Maintenance for motor vehicles
 Pottery Barn Kids
 Children’s furniture and accessories
OTHER REQUIREMENTS

1. The three generic strategies differ

in dimensions.
2. Requires different sources and
skills.
3. Sustained commitment to one of
the strategies is required to
achieve success.
Other requirements of the Generic Strategies

Generic Required Common

Strategy skills and Organizations
resources requirement
1. Substantial
Overall Cost 1. Tight cost control
capital
Leadership
Investment
2.Detail control report
2.Process
engineering skills
3.Incentive based on
3.Intense meeting strict
Supervision of quantitative targets
labour
4. Low cost
distribution
system
 Required skills and Common Organizational
Generic
resources Requirements
Strategies

Differentiation 1.Strong marketing

1. Strong coordination
abilities
among functions in R&D,
2.Product engg.creative product development and
flair, strong capability in marketing
basic research
2.Amenities to attract
highly skilled
3.Strong cooperation labour,scientists or
from creative people.
channels

Focus 1. Combination of the

1. Combination of the
above policies directed above policies directed at
at the particular the particular strategic
strategic target target.
Risks of the generic Strategies

Risks of Overall cost Leadership

1. Reinvesting in modern equipment
2. Scrapping obsolete assets
3. Avoiding product line proliferation
4. Alert for technological improvements
5. Low cost learning by industry newcomers
or followers through imitation
6. Inability to see required product or
marketing change because of the
attention placed on cost.
 Case 1: Ford Motors
• Ford Motor company in 1920 achieved unchallenged cost
leadership through limitation of the models and varieties,
aggressive backward integration, highly automated facilities.
• As the income rose, the market began to place more of a
premium on styling, model changes, comfort .
• Customer willing to pay a price premium to get such features
• General motors stood ready to capitalize on this development
with a full line models
• Ford faced enormous cost of strategic readjustment given the
rigidities created by heavy investments in cost minimization
of an obsolete model.
Case 2: Sharp
• Sharp is in consumer electronics
• It has followed a cost leadership strategy
• Its ability to undercut Sony’s and
Panasonics was eroded by cost increases
and U.S. antidumping legislation and its
strategic position was deteriorating
through sole concentration on cost
leadership.
 Risks of Differentiation

1.The cost differential between low cost

competitors and the differentiated firm
becomes too great for the differentiation to
hold brand loyalty. Buyers thus sacrifice
some of the features , services or image
possessed by the differentiated firm for
large cost savings
2.Imitations narrows perceived
differentiation , common occurrence as
industries mature.
Case
• Kawasaki and other Japanese motorcycle
producers have been able to successfully
attack differentiated producers such as
Harley-Davidson and Triumph in large
motorcycles by offering major cost savings
to buyers.
This case says that if the differentiated firm
gets too far behind in cost due to
technological change or simply inattention,
the low cost firm may be in a position to
make major roads.
Risks of Focus
1. The cost differential between broad range
competitors and the focused firm widens to
eliminate the cost advantages of serving
narrow target or to offset the differentiation
achieved by focus.
2. Competitors find submarkets within the
strategic target and out focus the focuser.
 STUCK IN MIDDLE
 Stuck in the middle:
 No competitive advantage
 Be doomed to below-average performance

High Focused, Differentiated Cost Leadership

Firms Firms

Return on
Investment
Stuck in
the Middle

Low
Market Share High
 Lessons from the Three
Generic Strategies
The essence of the three strategic choices:
 Whether to perform activities differently or to
perform different activities relative to competitors.
There are two fundamental strategic
dimensions: cost and differentiation
 The key is to choose one dimension and execute
on it consistently.
 According to Porter, firms that are “stuck in the middle”
either have no strategy or are drifting strategically.
 Three Strategic Groups in the Global
Automobile Industry

Figure 2.2
VALUE CHAIN
Value Chain
The value chain represents a set of activities that
organizations perform to distribute goods and
services. According to porter, the organization
can gain competitive advantage by managing
the value chain more effectively and efficiently
than the competitors.
Michael Porter proposed the value chain as a tool
for identifying ways to create more customer
value.
The value chain identifies nine strategically
relevant activities that create value and cost in
specific business.
These nine value- creating activities consist of
five primary activities and four support
activities.
The primary activities in value chain are-
 inbound logistics, represent the sequence of
bringing material into the business
 converting them into the final products-
operations
 Shipping out final product-outbound logistics
 Marketing them – marketing and sales
 Servicing them- service
The support activities are –
1. Procurement
2. Technology development
3. Human resource management
4. Firm infrastructure
 Value Creating Activities
Firm Infrastructure
Activities

M
Support

Human Resource Management A

RG
Technological Development IN
Procurement

M Service
Operations

Outbound

Marketing
Logistics
Inbound

& Sales
Logistics

IN
G
R
A
Primary Activities
Firm’s objectives:-
1. The firm’s task is to examine its cost and
performance in each value creating
activity and to look for ways to improve it.
2. Should estimate its competitors costs and
performance as benchmarks against its
own costs and performance.
3. Its success depends not only on how well
each department performs its work, but
also on how other departmental activities
are coordinated.
Core business processes

Core business processes –

It includes
1. The market sensing process
2. The new offering realization process
3. The customer acquisition process
4. The customer relationship
management process
5. The fulfillment management process
Strong companies develop superior capabilities
in managing their core processes.
For e.g. Wal-Mart
It has superior strength in its stock replenishment
process. As Wal-mart
sell their goods, sales information flows via
computer not only to Wal-mart headquarters' ,
but also to Wal-mart suppliers, who ship
replacement merchandise to the stores almost at
the rate it moves off the shelf. The idea is not to
manage stocks of goods, but flow of goods.
 The Value Chain System

Internally
Activities,
Performed
Costs, &
Activities,
Activities, Margins of Buyer/User
Costs, &
Costs, & Forward Value
Margins
Margins of Channel Chains
Suppliers Allies &
Strategic
Partners

Upstream A Company’s Downstream

Value Chains Own Value Chains
Value Chain
The value – delivery
network
1. Firm should look for competitive
advantages beyond it’s
operations.
2. Companies today have partnered
with specific suppliers and
distributors to create a superior
value delivery network
 E.g. for Value- delivery network
Levi Strauss’s Value- Delivery Network

Dupont(fibers)

Delivery Order
Milliken Competition is
between networks ,
(Fabric) not companies .The
Order winner is the company
Delivery with the better
Levi’s network.
(Apparel)

Delivery Order

Sears(retail)

Delivery Order

Customer
1. In this example of value – delivery network is
the one that connects Levi Strauss and
company, the famous maker of blue jeans, with
its suppliers and distributors .
2. One of Levi’s major retailers is Sears . Every
night Levi’s learns the sizes and styles of the
jeans sold through sears .
3. Levi’s then electronically orders more fabric for
next – day delivery from Milliken and company,
its fabric supplier. Milliken in turn relays an
order for more fiber to Dupont, its fiber supplier.
4.In this way , the partners in the supply chain
use most current sales information to
manufacture what is selling , rather than
forecast that may not match current demand
In this system, the goods are pulled by
demand rather than pushed by supply.
 THANK YOU
….